Tony Wickenden: Too good to be true?

A ‘new way’ for advisers to receive payments from life companies without triggering a surrender is not all it seems

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Over the past few weeks I have been looking at the facilitation of adviser charges through financial products, including those held in trust. In this final article in the series, I reflect on some noticeable “developments”.

It seems HMRC is now prepared to agree that, if an adviser is appointed by a life company to act in relation to funds invested in by an investor (in the bond issued by the company) who is also a client, the life company can make a payment to the adviser for that service.

This will be a taxable payment for the “service rendered” by the adviser to the life company but will not represent a surrender or part surrender of the policy. This means it will not give rise to any “eating into” the allowable 5 per cent withdrawals or a chargeable event.

As I have indicated over the past few weeks, however, any facilitation of an adviser charge would constitute a surrender and could give rise to a chargeable event and/or the “use” of the 5 per cent withdrawal allowances. So how would this work?

Looking more closely at the details of this possible “new way” for advisers to receive direct payments from life companies without triggering a surrender, there are some conditions to be satisfied.

The life company needs to allow policyholders to request a fund adviser be appointed as part of the policy terms. In this context, the fund adviser will either act on a discretionary or non-discretionary basis to give investment advice to the policyholder. In either case it would seem:

  • The fund adviser is appointed by the life company
  • The life company pays the agreed fee to the fund adviser for the service provided
  • The life company appoints the policyholder to act as their agent to make investment decisions on the life company’s assets
  • Investment recommendations made by the fund adviser are discussed with the policyholder and the fund adviser maintains records of discussions with the policyholder.

Let’s look at the position of a purely discretionary fund adviser. The adviser obtains a risk profile and general strategy from the policyholder. They will then be paid by the life company to manage those assets on its behalf. If this is all the adviser is doing, the costs the life company pass on to the policyholder in charges are not part surrenders of the policy.  

But what about if the fund adviser is acting on a non-discretionary basis and the policyholder, after taking advice, makes the investment decisions?

Provided the terms of business between the adviser and life company will determine the fees payable, there should be no problem. The policyholder does not have to meet those costs. They are the responsibility, under the contract, of the life company.

This is all well and good but it is essential payments for advice to the life company are strictly restricted to such advice. There must be no payment by the life company (under this “non-surrender route”) for any personal advice given to the policyholder (e.g. whether to continue holding the policy or to pay additional premiums).

All contracts entered into to incorporate this method of payment should make it clear the policyholder is making decisions as agent of the life company. The adviser is being paid only to provide advice to the policyholder as an agent on the investment of the life company’s assets. 

It will be interesting to see what investors’ reactions are to being told they are agents of a life company. It is essential the policyholder does not receive any benefit from the advice given to the life company (other than an indirect benefit in the form of any increase to the value of the policy where relevant) or purely incidental benefit.

So the cost incurred by a life company using a fund adviser will not constitute a part-surrender if the advice given and the decisions taken solely relate to the investment of the life company’s assets. If advice on matters other than that is given, a part surrender will occur.

It goes without saying, however, all of this remains theory unless a life company has the systems (and appetite) to facilitate it. Some have already been reported to be in the game; others will no doubt follow. Extra accounting care will need to be taken if a life company, in relation to a single investor, facilitates both a fund adviser charge for services performed for the life company and an adviser charge for personal advice services performed for the client.

In addition to the potential challenges identified, there is also the issue of the rights of the investor (in connection with the services provided by the adviser to the life company) considering the FCA and the FOS.

As the life company is the client in relation to advice on the funds, there could be a lack of protection for the policyholder if poor advice is provided. The way the arrangement (as described) is structured would avoid the application of the FCA’s rules on suitability and adviser charging. There would also be an absence of right to access to the FOS.

One cannot rule out action being taken by the FCA in relation to this but if the position were explained to the client (who may already be a little disconcerted by being appointed as an agent of the life company) I imagine they might not be too enamoured.

Tony Wickenden is joint managing director at Technical Connection 

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